Have your cake and eat it too.

Tag Archives: budget

The first personal finance book I read after graduating college was The Automatic Millionaire by David Bach. It was an eye-opening book and I loved the idea that you could “automatically” become a millionaire by paying yourself first and investing in a diverse portfolio of low-cost index funds. Another concept that was popularized by Bach and his book was the Latte Factor. He recounted a story of how he used to frivolously spend money on a latte everyday and that if he had saved that money instead and invested it, he would have a fortune. Check out the latte factor calculator and see how much money investing small savings can amount to.

Lately, I have seen a lot of criticism of the latte factor. Some argue about Bach’s math and how he calculates the amount you would amass by cutting out the daily latte. “Oh a latte doesn’t cost $5!” “The rate of return he used is too high!” And many argue that they don’t want to cut out their daily latte, that it wouldn’t make much difference, and that they’d be better off focusing on big expenses, not a $5 daily latte expense. One personal finance guru, who I respect, even said that he’d love to “catch” those who tout the latte factor at a Starbucks. I can just picture him seeing Bach or another latte factor supporter at the Starbucks holding a Venti Iced Vanilla Latte and yell, “I caught you red-handed! I knew you’d break down and buy a latte you HYPOCRITE!”

Critics of the Latte Factor seem to be taking the latte factor too literally. Nobody says that you can’t indulge in a latte once in a while. The latte factor is more of a metaphor to demonstrate that if we spend money on little expenses constantly, they add up. On the other hand, if we saved that money and invested it, the magic of compounding over years will give you a nice pile of cash. Many of the critics also argue that we should focus our energies on bigger expenses like housing and transportation, which are a much bigger proportion of our monthly expenses rather than waste time bothering with a $5 indulgence. While I agree that we should make sure that those expenses are reasonable, how often do you really have to spend energy on them. How often do you buy or rent a house? How often do you purchase a new car? Making sure you don’t buy more house than you need or a car that you can’t afford is important but it doesn’t mean you won’t have energy to focus on smaller expenses. You can do both!

The Latte Factor concept is more of a mindset where you are more conscious and intentional with your spending rather than buying latte, going out for lunch, getting a drink after work because, “hey it’s only a couple bucks, it’s okay” mindset. It’s not about deprivation and sacrifice. It’s about conscious and intentional spending. If you change your mindset and try brown bagging your lunch a few times or brewing your own coffee at home rather than buying it outside, you might find that this alternative option works just fine. It doesn’t mean that you are required to ONLY drink home-brewed coffee and that if you step into a Starbucks, you should be called a fraud by a personal finance blogger.

Small savings do really add up, but they won’t if you just leave it in your checking account. Most likely the money in your checking account will start to burn a hole in your pocket and there will be temptation to spend the money you saved by foregoing small expenses. Additionally, that money is not earning much if any interest. You need to invest it So start tracking your expenses and make a budget, which may include money for indulgences like lattes. Find what small indulgences that you can reduce or get rid of and make sure to have the excess money automatically sent to your investment accounts. I recommend using Personal Capital (affiliate link) to help with tracking your expenses and net worth.

Does cutting small expenses really make a difference? What small indulgence have you reduced or eliminated?

“I love it when a plan comes together” – Hannibal Smith from the A-Team

April is Financial Literacy Awareness Month, and Shannon from The Heavy Purse has invited many wonderful personal finance bloggers to write about “Getting Financial Real”. I am so excited that she asked me as well as many other wonderful bloggers to participate this Financial Literacy Awareness Carnival. Please check out Shannon’s post and the other posts by personal finance bloggers by clicking here.

I’m often amazed and inspired when I read about people who completely turned their lives around. They go from being deep in debt, struggling to stay afloat, to digging out of that mountain to become financially free. I’ve never carried a balance on my credit card (actually I did once, but only during the promotional 0% period), and have always been a frugal person who saves his money and lives within my means. The only debt I had was about $16,000 in student loans, but that’s okay, student loan is “good debt,” right?

The Ordinary
After graduating from college, I contributed to my employer’s deferred compensation plan up to the match which was 5%. I even opened an IRA account and contributed a small amount each month. I “invested” in the stock market, if you considering buying “hot stocks” I read about online to be investing. I lived within my means, but was still susceptible to lifestyle inflation. I was doing everything right according to the mainstream financial media. When I went back to graduate school part time, I added another $74,000 of student loan debt which totaled $90,000 in student loans. No worries, everyone says that it’s GOOD DEBT. However, I will say that the degree did increase my income potential and it ultimately was a good choice, but the student loan was a big financial burden. I extended my graduate school loan payments from a 10 year payoff plan to a 25 year payoff plan. I would be debt free when I turn 52! But once again, I didn’t worry since student loan is good debt and everyone I knew extended their payments. I patted myself on the back for all the great financial decisions that I made. I am glad that I was at least on the right financial path, but if you were to ask me whether I was “financially real,” I’d have to say “no.”

With #1, while I was doing a decent job saving money and not spending it frivolously, I really didn’t know where my money was going. I realized this when I was complaining to a friend about wanting to save more and getting ahead, but having a hard time because of student loans and the amount of money I spent on gas for my long commute. He asked me if I had a budget, I said, no. I didn’t think I needed one since I was living within my means. He asked me to do a quick mental budget calculation of my expenses, and when I did so, it dawned on me that I probably had the ability to save more than I thought.

As to #2, I only had vague goals of retiring at some point in time, traveling and buying a house. These goals seem far away and abstract. I wasn’t sure when it would happen, why I wanted those goals, just that those seemed like goals everyone has.

On to #3, I was always interested in saving and investing so I thought I had a plan, but it wasn’t a true blueprint or roadmap. It was just saving and investing for the sake of saving and investing. Not a bad thing, but not a roadmap.

Finally #4, I would say that I had a scarcity mindset rather than an abundance mindset. My main motivation for saving and being frugal was that I wanted to have more money and didn’t want to lose it. Also, while I was frugal, I was ashamed of it and thought that when I “made it,” I’d finally have the nice material things that everyone craves.

Journey to the Extraordinary
After I came to the realization that I lacked a roadmap and direction, I read and learned a lot from personal finance blogs. While we still do not have a monthly budget, my wife and I do track our expenses and determine how much we should be saving each month. Paula Pant from Afford Anything calls this type of budgeting the “easiest budget ever.” (We use Personal Capital to track our expenses and net worth which makes it a lot easier). We also paid off our high-interest student loan debt. Last fall, my wife and I bought a co-op, and I’d like to purchase a house in perhaps 6 to 7 years when we will likely outgrow our current space. I would also like to be financially independent in 10 years where I can continue working if I want, or leave and pursue other interests if I prefer that instead. Basically, I’d like to have the option of not having to go to work, and having my investments cover our expenses. My wife and I have ramped up our contributions into our 457 plans and Roth IRAs. We will hopefully be maxing it out at some point. We are also saving money in a 529 plan for our son. Recently, I’ve been looking into investing in rental properties. Finally, I’ve come to a realize that I am truly blessed with many wonderful things in life. I no longer think that being frugal is depriving myself because while money is important, it doesn’t buy you happiness.

Please share what motivated you to get real with your financial situation, the results and lessons you learned as you reclaimed your financial power.

Well it’s over a week into the New Year and I’m finally getting to this post. So my New Year’s resolution should probably be to stop procrastinating! Actually, I don’t like to make New Year’s resolutions because I almost never follow through with them anyway. But with a New Year and a new start, here are a few things that I think should be on everyone’s to do list. Plus, these are pretty simple and easy to do.

Make a Budget

I have to admit that my wife and I don’t really have a budget. I know what you’re thinking, “what kind of personal finance blogger doesn’t make a budget?” Well, my wife and I have listed all of our expenses and made a determination as to how much we should save each month, but we don’t track our spending. We live within our means and are pretty frugal, so there was no real need to have one. Keeping a budget just seems like too much of a hassle. But I’ve been reading a lot about Personal Capital from fellow bloggers and finally tried it out. I like the interface and the ability to see all my accounts on one site. No more having to log on to each individual account to see how it’s doing. It also tracks our expenses which will be helpful to see if there are leaks in our budget that can be cut. Also, Personal Capital is free so why not try it? To read a more thorough review, check out the review from Jacob who blogs at Cash Cow Couple.

Start Investing/Invest More

If you are still on the fence about whether you should start investing, well you really shouldn’t be. As I posted in When Lazy and Cheap is Better, investing does not have to be time consuming or complicated. So, if you haven’t started saving and investing for the future, now is the time to do it. Start contributing to your 401k. Go open an IRA account.

Whenever I read articles about starting to invest at a young age, I pat myself on my back for starting to invest in my 401K plan and opening an IRA retirement plan when I first started working. After reading an article from Matt who blogs at Mom and Dad Money, I realized that good habits can go bad. While, I’ve increased my contributions into my 401K plan, my IRA contributions have stayed the same. Yes, I still contribute the same amount as when I just started out and was making a much lower income. That pat on my back has turned into the kick in the butt I need. I will be increasing the amount that I contribute into my IRA.

Travel for free

One of my big regrets is not getting into travel hacking sooner. I did churn a couple of cards and received 2 free roundtrip tickets and a stay at a luxurious hotel, among other things. But now with a little baby, I don’t know if I’ll be traveling much in the near future. In addition, we are looking at taking on a mortgage, so we don’t want any dings on our credit report. But, I will definitely be looking to get back into the game ASAP. If you want to learn a little more about traveling for free, check out How to Travel the World for Pennies on Budgets are Sexy. I’ve told many friends and family about traveling for pennies using credit card rewards and bonuses, but many are skeptical or don’t want to make an effort to do it. For those who need some extra hand-holding, Brad from Richmondsavers offers a free travel rewards coaching program where he will teach you how to travel for free. His blog also offers instructional guides to travel to different locations for free, so make sure to check it out.

When asked the first step to financial freedom or to get out of debt, most people will say that it is to make a budget or to cut out expenses. The next step is to save and invest. These are the basic steps to having success in reaching your financial goals. However, without changing your money mindset, it will still be difficult to attain and maintain those goals. One of the reasons why I really enjoy reading the blog written by Mr. Money Mustache is because his guide to financial independence is not a mere how-to guide to saving by budgeting and cutting expenses. He has made Mustachianism into a way of life! He explains that you can have a good life living frugally or said in other terms, you can be living rich cheaply! Whenever opponents deride his extreme sacrifices to reach “retirement,” he contends that he has a nice house, eats organic foods, and has plenty of “toys.”

In an article by Laurie from the Frugal Farmer, she wrote about getting out of debt and said that you should view it as a “lifestyle change” rather than a “diet.” I think that is an excellent analogy, whether you are talking about getting out of debt or pursuing financial independence. With a diet, you inevitably get off the diet once you’ve reached the desired weight. This is one reason why almost all diets fail. Once you’ve reached the desired weight, if you go back to your prior lifestyle, you’ll gain back the weight and have to diet once again. Not so with a lifestyle change. If you change your lifestyle to one where you eat healthy and exercise, you will very likely be able to maintain that desired weight without ever dieting.

Similarly, dieting in the personal finance world would be akin to cutting expenses by making “sacrifices.” If you see cutting expenses such as cable television, fancy clothes, eating out or other luxuries as a “sacrifice” and self-deprivation, then it will be very hard to reach your financial goals. Changing your mindset where buying fancy clothes and eating out all the time is not a sacrifice is key in making strides in your money goals. You have to learn the difference between a want and a need. You have to prioritize and do some soul searching and figure out what really brings you happiness. Is it spending quality time with your loved ones or is it buying an luxury items? But once, again, changing your lifestyle does not necessarily mean not having many of the things that the Joneses have. This is living RICH cheaply, not living cheap cheaply.

Instead of buying a luxury car such as a BMW or a Mercedes Benz, I bought a Hyundai Sonata used. Both cars get you from point A to point B. I’m sure the luxury cars have some fancy features, but I don’t really know what they are nor do I care because my car is perfect for me. It has all the latest safety features, it is comfortable, it is reliable, it gets me where I need to go, and I do think it is a pretty attractive car.

A lot of people need to have the latest tech gadgets such as the newest iPad which costs about $500. I already have a laptop, so there really is no need for an iPad. Actually the laptop has more functionality and was cheaper than that iPad. But I am a little ashamed to say that, I did buy a tablet as well recently. What can I say, I indulged myself. I bought the Google Nexus on sale (as the model has been out for a year), with a coupon, reward points, cash back for $125. I figured at that price, I could afford to indulge a little.

Fancy clothes? I’m not a slave to fashion and rarely need to buy new clothes. I like to think that I have a “classic” look so my clothes don’t go out of style.

Going out to eat? When I’m busy and tired I might not enjoy having to cook, but in general I’ve learned to love it. (My wife and I love watching cooking shows and competitions like Master Chef). I like trying new recipes and I like that the food I make is healthier. But yes we do go out to eat. We don’t dine at fancy restaurants that charge an arm and a leg. Why? Is the food better? Not always. Maybe the decor is nicer, but when I eat out, I’m there for the food not the decor. And of course, we always find deals when we eat out.

Instead of going out to watch the latest movie, my wife and I watch Netflix in the comfort of our own home. So no, I do not think we are depriving ourselves. We are still enjoying life. We’re just not spending as much doing it. We are Living Rich Cheaply!

How did you change your money mindset? When you cut out expenses in your budget, do you think you are depriving yourself something?